MTU Weekend Ed. - Cliff (12/21/12)

It is our view that the proposed final upswing of the Hope Rally is likely to resume in the foreseeable future. Note that the SP400 mid-cap index has now registered a fresh Hope Rally high (Chart 1).

However, U.S. stocks have now pulled back sharply on fiscal cliff related pessimism. How do we put near term price actions into perspective?

Chart 2 presents the potential fractal in SPX that we have analyzed several times in the recent past. If price patterns continue to rhyme, the current pullback is likely a downswing from point 8 to point 9 which can coincide with rising market anxiety as U.S. finally arrives at the edge of the fiscal-cliff.  The corresponding level for point 9 is about 1395. 

In terms of wave structure, the sell-off is likely wave [c] of the retrace discussed in Retrace (12/14/12).  The blue count in Chart 3 illustrates.  Note that wave [c]-down can and is likely to extend towards the 1395 target under this interpretation.  Also note the immediate bullish count (Chart 3, green) and the bearish count (Chart 3, red).